Aston Martin (LSE:AML) was among the best-performing stocks on the FTSE 250 in 2023. That’s despite the share price plummeting 45% from its midsummer peaks to end the year at around £2.27 a share.
So why do I think the stock could be undervalued? Let’s take a closer look.
Overcoming challenges
Guided by chairman Lawrence Stroll, Aston Martin has ambitious plans to propel the iconic car brand to new heights.
Targeting £2bn in revenues and £500m in adjusted EBITDA by 2024/25, the company aims to increase annual car sales to 8,000 units, up from 6,412 in 2022.
Despite a Q3 hiccup and a revised volume forecast to 6,700 units for 2023, Aston Martin remains confident on achieving its objectives.
Management says it has adjusted production rates to meet projected demand for new models, including the DB12 orders.
Moreover, Aston Martin has recently disclosed its mid-term financial objectives for 2027/28. This includes a revenue milestone of £2.5bn and an EBITDA target of £800m during this period.
The company appears to be on the right track with several positive developments in production volume and, more importantly, margins.
The renewed focus on higher margin vehicles, including the DBX SUV and the Valkyrie hypercar, is central to this. Aston Martin is making 150 Valkyries, all of which have been sold — the cars are valued at $3m each.
Valuation
Analysts aren’t expecting Aston Martin to turn a profit until 2025. Thankfully, that’s not too far away. In the meantime, the board is focusing on ramping up production and reducing debt.
In the table below, I’ve highlighted the expected earnings per share (EPS) by the year, and created a price-to-earnings (P/E) ratio, where appropriate, based on the current share price.
| 2023 | 2024 | 2025 | |
| EPS | -28.1p | -7.7 | 8.7 |
| P/E | N.A. | N.A. | 26.1 |
As we can see, based on the current share price, Aston Martin has a forward P/E of 26.1, based on its expected 2025 earnings. While that might not sound cheap, I’d expect this EPS growth to be sustained in positive numbers.
What makes this particularly interesting is that sector leader, Ferrari — which has excellent margins — trades at 49.1 times earnings. That’s almost double the forward P/E of Aston Martin.
Of course, Ferrari will likely have less debt today than Aston will in two years. Likewise, some may claim that Ferrari has better brand value.
Nonetheless, I’d expect Aston to experience stronger earnings growth from 2025 onwards. That’s partially because Aston has a lower starting point, but it’s also the case that Stroll has done a lot to refresh the luxury car maker.
This includes the movement towards everyday vehicles, notably the DBX, and entry of Aston Martin into Formula 1. The latter appears to be doing wonders for the brand in the US.
